Ocean Manufacturing
1. The client acceptance process can be quite complex. Discuss five procedures an auditor should perform in determining whether to accept a client. Which of these five are required by auditing standards and identify the applicable standards?
1. Obtain an understanding of the client 's business and operations. Consideration should be given to reading available financial information regarding the prospective client such as annual reports, registration statements, Forms 10-K, other reports to regulatory agencies and income tax returns.
2. Inquire as to the general reputation of high ranking employees, influential directors and shareholders, as well as the entity itself. Carefully consider any matters that may negatively reflect on management 's integrity, ability and attitude. Such inquiries may be directed to the prospective client 's bankers, legal counsel, underwriters, and others in the business community. Background checks obtained by investigative firms may also be useful.
3. Consider management 's response to observations about or suggestions for improvements in internal controls made by the predecessor auditor and/or the internal auditor.
4. Consider the composition and autonomy of the Board of Directors and the Audit Committee, including the number of independent outside directors.
5. Communicate with the predecessor auditor in accordance with the provisions of Statement on Auditing Standards (SAS) No. 84 [AU315]. Inquiries should be directed to the integrity of management and the reasons for the change in auditor. The following situations should be carefully considered in assessing whether to accept a client: o There has been a disagreement with the previous auditor over accounting principles or practices; financial statement disclosures; auditing scope; or the Form 8-K discloses a reportable event as defined in Securities and Exchange Commission Regulation S-K. o The previous auditor resigned or declined to stand for re-election or there is
1. Obtain an understanding of the client 's business and operations. Consideration should be given to reading available financial information regarding the prospective client such as annual reports, registration statements, Forms 10-K, other reports to regulatory agencies and income tax returns.
2. Inquire as to the general reputation of high ranking employees, influential directors and shareholders, as well as the entity itself. Carefully consider any matters that may negatively reflect on management 's integrity, ability and attitude. Such inquiries may be directed to the prospective client 's bankers, legal counsel, underwriters, and others in the business community. Background checks obtained by investigative firms may also be useful.
3. Consider management 's response to observations about or suggestions for improvements in internal controls made by the predecessor auditor and/or the internal auditor.
4. Consider the composition and autonomy of the Board of Directors and the Audit Committee, including the number of independent outside directors.
5. Communicate with the predecessor auditor in accordance with the provisions of Statement on Auditing Standards (SAS) No. 84 [AU315]. Inquiries should be directed to the integrity of management and the reasons for the change in auditor. The following situations should be carefully considered in assessing whether to accept a client: o There has been a disagreement with the previous auditor over accounting principles or practices; financial statement disclosures; auditing scope; or the Form 8-K discloses a reportable event as defined in Securities and Exchange Commission Regulation S-K. o The previous auditor resigned or declined to stand for re-election or there is